The Cabinet is likely to consider tomorrow the sale of government's 51.11 per cent stake in Hindustan Petroleum Corp Ltd (HPCL) to Oil and Natural Gas Corp (ONGC) for over Rs 28,000 crore, a source said.
The Department of Investment and Public Asset Management (DIPAM), ministry of finance, has moved the proposal for consideration of the Cabinet Committee on Economic Affairs (CCEA), said the source who could not be named because the information is not public.
Flowing from Finance Minister Arun Jaitley's Budget announcement of creating an integrated oil company, the government plans to divest its entire 51.11 per cent shareholding in India's third-biggest fuel retailer HPCL to oil producer ONGC.
HPCL will however not be merged with ONGC. It will remain a separate entity and operate as ONGC's subsidiary.
As part of the transaction, HPCL may takeover operations of Mangalore Refinery and Petrochemicals Ltd, the source said.
ONGC currently owns 71.63 per cent of MRPL while HPCL has 16.96 per cent stake in it. The source said it makes better sense for ONGC to consolidate all the refining operations in one unit, he said.
MRPL will be the third refinery of HPCL, which already has units at Mumbai and Visakhapatnam in Andhra Pradesh. HPCL stock closed at Rs 368.75, down 2.32 per cent, on BSE, while ONGC ended 1.06 per cent up at Rs 161.75.
After the Cabinet nod, the government will move to appoint valuation and transaction advisers while ONGC too may decide to hire merchant bankers to arrive at the valuation of government shareholding.
ONGC had evaluated options of acquiring either HPCL or Bharat Petroleum Corp Ltd (BPCL) - the two downstream oil refining and fuel marketing companies. It found the nation's second-biggest fuel retailer BPCL too expensive and conveyed its choice to the parent oil ministry, which relayed it to DIPAM.
Another source said the transaction is likely to be completed within this fiscal year.
ONGC has cash reserves of Rs 13,014 crore and to fund the government stake acquisition in HPCL, it will have to borrow at least Rs 10,000 crore, the source said.
BPCL has a market cap of Rs 1,01,622.07 crore and buying government's 54.93 per cent would alone have entailed an outgo of Rs 55,821 crore.
HPCL on the other hand has a market cap of Rs 56,162.88 and buying government's entire 51.11 per cent stake would entail an outgo of Rs 28,700 crore. Another Rs 14,600 crore or so would be required in case open offer for an additional 26 per cent has to be made.
Sources said the government was initially looking at creating an integrated oil company through merger of an oil producer with a refiner but the idea was dropped for the fear of repeating the Air India-Indian Airlines kind of a merger which is not considered successful.
Similar differences in work culture and ethos prevail in upstream and downstream firms and so the exercise under consideration now is to only help government mop up resources and HPCL would become a mere subsidiary of ONGC.
There are only six major companies in the oil sector - ONGC and Oil India Ltd being the oil producers, Indian Oil Corp (IOC), HPCL and BPCL in refinery business and GAIL in midstream gas transportation business.
The rest, such as ONGC Videsh, Chennai Petroleum Corp (CPCL), Numaligarh Refinery Ltd and MRPL, are already subsidiaries of one of these six PSUs.
HPCL will add 23.8 million tonnes of annual oil refining capacity to ONGC's portfolio, making it the third-largest refiner in the country after IOC and Reliance Industries.